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Turkish Lira Plunge Deeper as US-Turkey Geopolitical Tensions Continue

Turkey’s lira went on a free-fall and lost as much as 14 percent on Friday as concerns about President Tayyip Erdogan’s influence on monetary policy and worsening US relations rippled into a market panic, which also was a blow to shares of European banks.

Erdogan replied by advising Turks to exchange their gold and hard currencies into lira, describing the crisis as a national battle against economic enemies.

The sell-off has worsened the concerns about exposure to Turkey, specifically whether over-indebted companies can still pay back loans taken out in euros and dollars following years of overseas borrowing to finance a construction boom campaign under Erdogan’s regime.

Erdogan’s characteristic toughness in the middle of the crisis has further jittered investors and market participants. The president says a shadowy “interest rate lobby” and Western credit rating agencies are attempting to take down Turkey’s economy, appealing to the Turks’ patriotism.

“If there is anyone who has dollars or gold under their pillows, they should go exchange it for liras at our banks. This is a national, domestic battle,” he told people in the northeastern city of Bayburt. “This will be my people’s response to those who have waged an economic war against us.”

The lira has lost a third of its value this year, and it fell again on his comments and was trading around 6.05 to the dollar after he spoke, almost 9 percent weaker on the day.

“The dollar cannot block our path. Don’t worry,” said Erdogan, attempting to reassure the crowd.

This cannot possibly soothe investors who are still worried about the worsening spat with the United States. The NATO members were in friction over the detention in Turkey of US evangelical pastor Andrew Brunson on terrorism charges.

For investors, the tensions with Washington have highlighted Turkey’s authoritarian trajectory under President Erdogan.

“The basic reason the exchange rate has gone off the rails is that confidence in the management of the economy has disappeared both domestically and abroad,” stated Seyfettin Gursel, who is a prominent economist and a professor at Turkey’s Bahcesehir University.

“First of all, confidence needs to be regained. It is obvious how it will be done: since the final decision-maker of all policies in the new regime is the president, the responsibility of regaining confidence is on his shoulders. “

The lira fell briefly as much as 14.6 percent, which is its largest one-day plunge since early 2001, before recovering losses. Shares of Europe-based lenders also slipped, rattled by concerns about their Turkish exposure.
Turkey’s sovereign dollar-denominated bonds slipped with many issues trading at record troughs. Hard currency debt from the Turkish banks suffered similar losses.

Meanwhile the cost of insuring exposure to Turkey’s sovereign debt through five-year credit default swaps has climbed to the highest level since March 2009, beating levels seen for serial defaulter Greece. Greece has had three bailouts so far in the last decade.

Drastic Intervention Needed

Finance Minister Berat Albayrak, who is Erdogan’s son-in-law and who was appointed just last month, was announcing the government’s most recent plan for the economy. Turkey is planning to adopt a new approach under its executive presidency. It would be one that the government could sustain, and it would be based on “strategic mentality,” he said.

The currency has slipped down more than 35 percent this year after shedding almost a quarter of its total value in 2017. Just this week, it has already lost around 15 percent. This kind of drastic plummet drives up the cost of imported goods – from fuel to food – for ordinary Turkey residents.

“The situation of Turkey cannot go on for much longer – I think they will have to intervene,” said Cristian Maggio, who is the head of emerging markets strategy at TD Securities. He also added that the intervention needed to be “drastic.”

“Turkey is playing a very dangerous game. They keep lagging behind curve and the pace of the depreciation and the penalty that the market inflicts on Turkey when it sells off is increasing at a more than linear pace, almost exponentially.”

Erdogan, who is a self-described “enemy of interest rates,” pushes for low cost credit from banks in order to spur growth, but investors fear that the economy is overheating and could be for a catastrophic touchdown. His comments on interest rates, as well as his recent appointment of his son-in-law as the country’s finance minister, have already fueled perceptions that the central bank is not really acting on its own and independent.

The central bank had decided to increase interest rates to support the lira during an emergence move last May, but it didn’t do so during its last meeting.

Even though the US and Turkey has been in disagreement about a bunch of issues, the worst has been revolving around Brunson and the detention of other US citizens in Turkey. A delegation of Turkish officials conducted talks with their counterparts in Washington this week. However, there was no sign of a solution.